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Intro To Portfolio MGT

Portfolio management involves creating a balanced mix of investments to meet financial goals while managing risk. A portfolio manager considers an individual's situation and constructs a portfolio using asset allocation across stocks, bonds, and cash equivalents. Regular rebalancing ensures the portfolio stays aligned with the original risk and return profile as market conditions change. Both active and passive strategies exist, with passive indexing seeking to match overall market returns at lower cost. Effective portfolio management focuses on asset allocation, diversification, and periodic rebalancing for long-term investment success.

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64 views39 pages

Intro To Portfolio MGT

Portfolio management involves creating a balanced mix of investments to meet financial goals while managing risk. A portfolio manager considers an individual's situation and constructs a portfolio using asset allocation across stocks, bonds, and cash equivalents. Regular rebalancing ensures the portfolio stays aligned with the original risk and return profile as market conditions change. Both active and passive strategies exist, with passive indexing seeking to match overall market returns at lower cost. Effective portfolio management focuses on asset allocation, diversification, and periodic rebalancing for long-term investment success.

Uploaded by

Lea Andrelei
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRODUCTION

TO PORTFOLIO
MANAGEMENT
Some individuals do their own investment
portfolio management. That requires a
basic understanding of the key elements
of portfolio building and maintenance that
make for success, including asset
allocation, diversification, and
rebalancing.
Understanding Portfolio Management
Professional licensed portfolio managers work on
behalf of clients, while individuals may choose to
build and manage their own portfolios.
In either case, the portfolio manager's ultimate
goal is to maximize the investments' expected
return within an appropriate level of risk
exposure.
Portfolio management requires the ability to
weigh strengths and weaknesses, opportunities
and threats across the full spectrum of
investments. The choices involve trade-offs, from
debt versus equity to domestic versus
international, and growth versus safety.
What Is the Objective of
Portfolio Management?
The objective of portfolio management is
to create and maintain a personalized plan
for investing over the long term in order
to meet an individual's key financial
goals.
This means selecting a mix of investments
that matches the person's responsibilities,
objectives, and appetite for risk. Further, it
means reevaluating the actual performance
of the portfolio over time to make sure it is
on track and to revise it as needed.
What Does an Investment
Portfolio Manager do?
An investment portfolio manager meets
with a client one-on-one to get a detailed
picture of the person's current financial
situation, long-term goals, and tolerance
for risk.
From there, the portfolio manager can
draw up a proposal for how the client
can meet their goals. If the client
accepts the plan, the portfolio can be
created by buying the selected assets.
The client may start out by contributing a lump
sum, or add to the portfolio's balance
periodically, or both.

The portfolio manager takes responsibility for


monitoring the assets and making changes to the
portfolio as needed, with the approval of the
client.
Portfolio managers generally charge
a fee for their service that is based on
the client's assets under management.
Investors have two main investment strategies
that can be used to generate a return on their
investment accounts:

Active portfolio management


Passive portfolio management
ACTIVE PORTFOLIO MANAGEMENT

It requires strategically buying and selling


stocks and other assets in an effort to beat the
performance of the broader market.
Active management involves attempting to beat
the performance of an index by actively buying
and selling individual stocks and other assets.
Closed-end funds are generally actively
managed. Active managers may use any of a
wide range of quantitative or qualitative models
to aid in their evaluations of potential
investments.
Active portfolio management usually
involves more frequent trades than passive
management.
An investor may use a portfolio manager to
carry out either strategy, or may adopt either
approach as an independent investor.
Active management portfolios strive
for superior returns but take greater
risks and entail larger fees.
An actively managed investment fund has an
individual portfolio manager, co-managers,
or a team of managers all making
investment decisions for the fund. The
success of the fund depends on in-depth
research, market forecasting, and the
expertise of the management team.
Portfolio managers engaged in active
investing follow market trends, shifts in
the economy, changes to the political
landscape, and any other factors that may
affect specific companies. This data is used
to time the purchase or sale of assets.
PASSIVE PORTFOLIO
MANAGEMENT
It seeks to match the returns of the market
by mimicking the makeup of an index or
indexes.
What is an INDEX?
An index is a method to track the
performance of a group of assets in a
standardized way. Indexes typically measure
the performance of a basket of securities
intended to replicate a certain area of the
market.
Indexes are also created to measure
other financial or economic data such as
interest rates, inflation, or
manufacturing output. Indexes often
serve as benchmarks against which to
evaluate the performance of a portfolio's
returns.
One popular investment strategy,
known as indexing, is to try to
replicate such an index in
a passive manner rather than trying to
outperform it.
Indexes are useful for providing valid
benchmarks against which to measure
investment performance for a given
strategy or portfolio. By understanding
how a strategy does relative to a
benchmark, one can understand its true
performance.
Indexes also provide investors with a
simplified snapshot of a large market
sector, without having to examine
every single asset in that index.
For example, it would be impractical for an
ordinary investor to study hundreds of
different stock prices in order to understand
the changing fortunes of different technology
companies. A sector-specific index can show
the average trend for the sector.
Market indexes provide a broad
representation of how markets are
performing. These indexes serve as
benchmarks to gauge the movement and
performance of market segments. Investors
also use indexes as a basis for portfolio or
passive index investing.
Key Elements of Portfolio Management
Asset Allocation
The key to effective portfolio management is the
long-term mix of assets. Generally, that means stocks,
bonds, and cash equivalents such as certificates of
deposit. There are others, often referred to as
alternative investments, such as real estate,
commodities, derivatives, and cryptocurrency.
Asset allocation is based on the
understanding that different types of assets
do not move in concert, and some are
more volatile than others. A mix of assets
provides balance and protects against risk.
Investors with a more aggressive profile weight
their portfolios toward more volatile investments
such as growth stocks.
Investors with a conservative profile weight
their portfolios toward stabler investments such
as bonds and blue-chip stocks.
Diversification
The only certainty in investing is that it is
impossible to consistently predict winners
and losers. The prudent approach is to create
a basket of investments that provides broad
exposure within an asset class.
Diversification involves spreading the risk and
reward of individual securities within an asset
class, or between asset classes. Because it is
difficult to know which subset of an asset class or
sector is likely to outperform another,
diversification seeks to capture the returns of all of
the sectors over time while reducing volatility at
any given time.
Real diversification is made across
various classes of securities, sectors
of the economy, and geographical
regions.
Rebalancing
Rebalancing is used to return a portfolio to its
original target allocation at regular intervals,
usually annually. This is done to reinstate the
original asset mix when the movements of the
markets force it out of kilter.
For example, a portfolio that starts out with a
70% equity and 30% fixed-income allocation
could, after an extended market rally, shift to
an 80/20 allocation. The investor has made a
good profit, but the portfolio now has more
risk than the investor can tolerate.
Rebalancing generally involves
selling high-priced securities and
putting that money to work in lower-
priced and out-of-favor securities.
The annual exercise of rebalancing allows
the investor to capture gains and expand
the opportunity for growth in high-
potential sectors while keeping the
portfolio aligned with the original
risk/return profile.
Conclusion
Anyone who wants to grow their money has choices
to make. You can be your own investment portfolio
manager or you can hire a professional to do it for
you. You can choose a passive management strategy
by putting your money in index funds. Or, you can
try to beat the markets by moving your money more
frequently from one asset to another.
In any case, you'll want to pay attention to
the basics of portfolio management: pick a
mix of assets to lower your overall risk,
diversify your holdings to maximize your
potential returns, and rebalance your
portfolio regularly to keep the mix right.
-END-

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